In recent years, trading bot algorithms have become increasingly popular with Forex and crypto traders of all skill levels. Investors are always looking for better ways to make a profit and beat the markets, and with algo trading bot that becomes easier for everyone to achieve. On AtoZ Markets website, you will find more articles about trading bot articles. Have a look to them as well.
You, however, need trading bot strategies to trade because that's the only way you can consistently earn.
Making money with the markets is really very difficult. 96% of retailers lose money. After spending countless hours in front of charts trying to find 'good entry points', I can attest to this. The problem is further magnified in cryptocurrencies simply because there are hundreds of exchanges, thousands of cryptocurrency markets, and each market is 24/7. Making sure you are trading correctly is really difficult!
Not everyone is destined to become a trader and not everyone should try too.This is exactly why I think the vast majority of us should focus on using trading bot strategies.
What Is A Trading Bot?
A trading bot is software that allows for the automation of the execution of orders on the stock exchange. In other words, it is a program integrated into a trading platform and which passes trades under certain conditions without the intervention of the trader.
This type of software allows you to open and close positions following a well-developed algorithm. The trading robot is sometimes referred to as a trading bot, autotrader or Expert Advisor (in the case of the Metatrader platform).
How Does A Trading Bot Work?
Trading bots work like any computer program. Following is the line of code instructions established by a precise algorithm. An investor can decide to create a custom trading robot based on the criteria of his trading strategy; using technical, quantitative and fundamental indicators.
The gears of a trading robot are therefore its source code with which its programmer records the conditions for placing an order. The parameters taken into consideration can be different:
- The market trend
- Economic news
- Technical indicators
- Price action
- As well as other factors
These programs monitor the market 24 hours a day. So they allow investors not to miss any opportunities.
Types of Trading Tobots
Different types of robots are created to allow traders and investors to make money online.
- Technical analysis bots: This category of robots analyzes prices in order to detect chart patterns and trigger levels or technical indicator settings. They can combine their technical indicators and chart patterns to create more complex strategies to increase the likelihood of success.
- Fundamental analysis bots: These are robots that trade macroeconomic events and indicators. The most common are news trading robots. The price of an instrument can fluctuate rapidly after the publication of the numbers of an economic indicator, so it is essential to have a fast EA that can take advantage of the movement.
- Quantitative analysis bot: This type of robot relies on mathematical and statistical models to identify opportunities and place orders accordingly. The models are driven by quantitative analysis and quantum trading is often referred to. Quantitative analysis therefore makes it possible to determine and exploit repetitive behaviors on instrument fluctuations.
- Scalping robots: they are robots that take advantage of small changes in the price of an instrument during the trading session.
- Day trading bots: Day trading consists of taking short-term positions that are usually closed before the trading session ends. Most robots are developed for day trading. Day trading robots can also incorporate fundamental, technical or quantitative analysis.
Pros and Cons of Trading bot Algorithms
Trading bot algorithms have many benefits, but the robot cannot be left to trade unattended.
Trading bot strategies have become a common phenomenon due to the many benefits offered by trading robots. But they have some limitations.
- Fast transaction processing: the robots are much faster in making an order than humans. When trading manually, you will need to enter the exit levels (take profit and stop loss), enter the position size and finally validate your entries. Bots can take all of these parameters into account before they even find a trading signal. Order execution speed is an important factor for day traders and scalpers.
- Increased liquidity in the markets: Automated trading programs are generally more active than manual traders. This results in more orders placed and greater market liquidity. For example, high frequency trading robots place a large number of orders per day. Therefore, other market participants will find counterparties for their buy and sell orders more quickly thanks to automatic trading.
- Efficiency over time: trading robots allow you to carry out your business by intervening on the markets. Some trading styles such as day trading and scalping require you to always be in front of your screens watching the markets for trading signals. If you have a profitable strategy and manage to automate, it will save you a lot of time.
- 24/5 analysis: Obviously it is impossible to monitor the markets around the clock and you may be missing out on opportunities. Trading robots monitor the market for you all the time. This is especially useful in the Forex market which is open 24 hours a day, 5 days a week.
- Trading without emotion: Many traders agree that emotions are the hardest factor to control in trading. It is not uncommon for the trader to deviate from their trading plan after making substantial gains or after suffering losses. The advantage of a robot trader is that it follows the predetermined plan in all situations. Using an EA helps bypass emotional trading.
- Fewer errors: is obvious that a beginner will make mistakes during these first steps on the court. For example, we can inform the trading platform of an inappropriate position size which can lead to larger losses than expected. With an EA you can set the position size, take profit and stop loss based on certain conditions. This greatly reduces the risk of error.
Disadvantages of trading with robots
While the list of benefits of using trading robots is extensive, they also encounter some challenges. AtoZ Markets has found the following to be the downside of trading bots:
- Robot monitoring: While it is no longer necessary to monitor markets with the use of a robot, monitoring is still required. The program may face bugs or other challenges such as server failure or internet connection loss. Also, like any computer program, the trading robot can suffer malfunctions which can lead to losses.
- Flash crashes: Flash crashes are a stock market phenomenon that is increasingly present in the markets. These are rapid and violent fluctuations in instrument prices that can lead to the activation of many pending orders. Trading robots are often spotted during flash crashes. In fact, coding bugs have led to a number of market crashes.
One of the most notable flash crashes occurred on May 6, 2010, when a transaction worth over $4.1 billion was placed on the New York Stock Exchange. The Dow Jones index had thus lost more than 1000 points before returning to pre-crash levels 15 minutes later. Such a phenomenon cannot be caused manually by a market participant. The exact causes of this flash crash are still undetermined.
What to Consider When Choosing a Trading Bot?
Risk management, trading style and backtesting are among the factors to consider when choosing your robot.
To get the most out of a trading robot, there are a number of factors to consider. We will discover some of them.
The opinions of investors using a specific robot help us judge its actual performance. The more positive user reviews for a bot, the more you can trust the robot in question.
The track record of the system must also be taken into account. A trading robot that has years of history with satisfactory results is more reliable than an autotrader that has excellent performance, but only within two months.
Backtesting is the set of tests carried out on a robot using historical market price data. It can then give you an idea of the robot's historical performance on various markets.
A tested back trading robot provides details on how it performed in different market conditions. With the backtest we can find out what are the weak points of the robot. For example, a trading bot can make decent gains when the market is trending, but when it enters a trading range it starts taking trade losses.
Therefore, the developer of the algorithmic trading bot can add instructions or lines of code to ensure that the robot only operates in a trending market. Backtesting also lets you know how the trading robot behaves with different market volatility. However, past performance is no guarantee of future results.
Constraints on the size of the position
For this criterion, you need to know if the algo trading bot is suitable for your trading account type. There are many online trading robots that use martingale or grid trading systems.
This type of automatic trading strategy often requires considerable capital. If you have small capital, you could lose half of your balance in just a few trades. We advise you not to use an algo trading bot based on a martingale strategy. Also, you should give preference to autotraders which allow you to define the size of the positions yourself.
Forward test: Demo account results
Of course, before allowing a trading robot to take positions with real money, it must first be tested using a demo account. You will be able to get an idea of its effectiveness during live market conditions because backtesting is not enough. This step is called forward testing and is not only applicable to the trading robot. Any automatic trading strategy should be tested in live market conditions before being implemented.
Best Trading Bot Strategies
What are the main trading robot strategies used by industry experts? Below are some strategies that you can use with a bot.
Comrade Martingale loved to play in casinos and came up with this automatic trading strategy. The method really worked and is now banned in all casinos in the world. In short, the strategy, according to the Martingale method, is based on doubling the rate after an unsuccessful deal.
If it is long, then each subsequent bet is doubled until the bet is winning. After a winning bet, the player returns to the minimum bet.
In trading on financial markets, this method makes no sense to use as a separate strategy, but as a diversification (hedging), with a steady trend, it is just right!
But even here it is worth considering factors such as:
- The size of the deposit. You can't double a lot with a small deposit, you understand;
- Trading should be conducted exclusively along the trend;
- Well, a reasonable limit. If you made a mistake, incorrectly determined the direction of the trend or did not take into account important news, then no martingale will help you. Therefore, it is worthwhile for yourself to determine the maximum number of steps to increase the amount per option.
The Fibonacci strategy
This strategy, based on a logical sequence of numbers, was discovered by Leonardo Fibonacci back in the 13th century, and it remains one of the most accurate trading bot strategies in trading in the financial markets!
When using this strategy in trading on the Forex currency market or CFD contracts, the algo trading bot performs the following actions:
- Tracks the most volatile currency pairs;
- Analyzes found pairs and looks for the most stable trends;
- Plots a Fibo grid from the lowest point of the trend to the highest (in an uptrend), or from the highest to the lowest in a downtrend;
- The levels in the grid are the support-resistance lines. The numbers show the strength of the level;
- The breakout of the level tells the trading bot about a strong trend, the rebound and reversal from the level - about the trend change.
Support-resistance levels are the most significant signal points in trading. Therefore, 90% of trades that the robot opens according to the Fibonacci strategy are closed in profit.
Classic trading system
The classic binary trading system, as the authors called it, is a set of technical indicators and pivot points.
Indicators embedded in the classic trading system:
- Oscillator RSI (Relative Strength Index) - an index of relative strength. The indicator determines the strength of the current trend and the likelihood of its change. One of the most accurate and popular technical indicators;
- Oscillator MACD (Moving Average Convergence Divergence) - based on the ratio of two moving averages, it also determines the strength and direction of the trend. Shows pivot points. Also, it has high accuracy and is included in many profitable strategies;
- Bollinger Bands trend indicator - in fact, Bollinger bands is a moving average with two lines forming a price corridor. The price exit from the corridor is a signal;
- Moving Average is also a trend indicator, translated as moving averages. If it is applied correctly, it is only on the basis of its readings that one can successfully earn money in the financial markets.
These 4 indicators listed above are quite enough to receive accurate signals to enter the market. They themselves double-check and confirm each other!
This is what the strategy would look like on a chart in the Mate Trader 4 terminal:
And the entry point is the coincidence of the readings of all indicators. If any one has a deviation, then the algorithmic trading bot does not open a deal.
How to Build an Algorithmic Trading System?
Today it is easy to build an algorithmic trading system without coding thanks to interactive development tools. You can also hire a freelance developer for more advanced strategies.
MT4 is the most used platform for creating trading robots. Its MQL4 programming language is easy enough to learn. There is also a large community of developers that you can ask for help. To automate trading bot strategies you can hire a freelancer if you don't have the time to learn all the ins and outs of the platform.
There are also tools that allow you to build an algorithmic trading system without coding. Among them are the MetaQuotes Visual Strategy Builder and EA Builder Pro. These tools can automate simple strategies.
Trading bot algorithms have made online trading even more accessible. In addition to copy trading, beginners and experienced investors can now develop their own trading bot strategies without coding experience. There are many tools available to build an algorithmic trading system without coding. For more advanced trading bot strategies, you can resort to scripting languages that allow for more sophisticated strategies.
The fastest way to find an algo trading bot is to buy it from marketplaces or dedicated sites. However, some aspects need to be taken into consideration in order not to fall for an unreliable algorithmic trading bot.